Corporate Earnings Fuel Optimism for Market Recovery

Despite easing tensions in the Middle East, markets could still experience turbulence. However, investors are increasingly focusing on companies' intrinsic performance – their "fundamentals" – rather than short-term news. Indeed, U.S. corporate profits saw steady growth in the first quarter, with technology stocks leading the market's advance. As economic indicators such as exchange rates, interest rates, and oil prices stabilize, the market appears more sensitive to concrete earnings figures than to uncertainty.

In this environment, a flexible asset allocation strategy becomes paramount. This typically involves a base allocation of 60% stocks and 40% bonds, with adjustments to increase exposure to growth stocks and incorporate income-generating and alternative assets that provide stable returns, depending on market shifts. Within equity assets, a discerning approach is needed, focusing on AI infrastructure-related companies, including semiconductors that maintain high demand and profitability, alongside expanding AI investments. The healthcare and defense sectors are also gaining attention for balancing growth and stability. Strategically, maintaining some exposure to emerging markets, particularly India, which is emerging as a key hub for global supply chain realignments and showing distinct corporate profit growth, remains a valid approach. For bond assets, the focus is on enhancing portfolio stability and downside resilience through flexible responses to interest rate levels (rather than just direction) and utilizing tools like monthly dividend ETFs.

The market is currently in a different phase than the low-interest-rate era of the past. A mid-interest rate environment of 3-4% has become the new normal, with volatility tending to solidify at elevated levels. In this "mid-rate, high-volatility" landscape, incorporating flexibility is essential. Stock investments, especially in technology, should be approached with this context in mind. The investment cycle, initiated by Nvidia in semiconductor design, is now expanding to memory semiconductors, power grids, and communication infrastructure. This represents an inevitable expansion to resolve bottlenecks in existing growth rather than the emergence of entirely new themes. The surge in AI computing demand is accelerating investments in power grids and infrastructure expansion. Recently, robotics, dubbed "Physical AI," has also emerged as a new growth axis, signifying that AI is moving beyond software to application in real industrial settings and physical spaces, entering an early phase of driving productivity improvements across manufacturing automation, logistics, and services. As technological advancement expands into a multi-layered structure connecting infrastructure and applied industries, rather than a single theme, a broad perspective across the entire value chain within technology stocks is necessary from a structural viewpoint.

In an environment where geopolitical risks are becoming常态 (constant), building buffers into portfolios is also strategic. Tensions in the Middle East and Eastern Europe, which may alternate between easing and flaring up, can act as factors heightening supply chain instability and inflation concerns. To prepare for this, diversifying volatility through alternative assets like gold or digital assets is a valid approach. The objective is not risk avoidance, but rather strengthening the overall portfolio by utilizing assets that exhibit different performance patterns from traditional assets. In a volatile market, creating a structure that rapidly adapts to change is more critical than seeking answers within a specific asset class. Dynamic asset allocation, which actively utilizes a diverse range of assets, signifies a process of adaptation rather than mere mechanical adjustments, becoming a key factor differentiating performance in the current market environment.